Leucadia Likes WilTel Story

Leucadia National ( LUK) announced Thursday it offered to buy the 53% of WilTel Communications ( WTEL) it doesn't already own. The news sent the telecom outfit's stock surging 37% and signaled that Leucadia, the media-shy vulture firm with alliances with Warren Buffett, has great confidence in WilTel's prospects.

Under terms of the proposal, WilTel shareholders would receive 0.3565 Leucadia shares for each WilTel share -- a stock-swap deal that represents a 30% premium on WilTel's shares, according to Leucadia's news release. Shares of the battered telecom outfit were halted after soaring 37% to $14.51. Leucadia's stock eased 2.4% to $37.74. Based on Wednesday's closing price, Leucadia's offer has a per-share value of $13.78.

WilTel confirmed the offer was made, but declined to comment.

The move by Leucadia -- something of a miniature but similarly successful version of Buffett's Berkshire Hathaway ( BRK.A) -- marks the latest significant move by a deep-value bargain hunter into the badly bruised telecom arena. In July 2002, Leucadia made a $330 million investment in WilTel, then Williams Communications, to help the company emerge from bankruptcy proceedings. Around that time, Berkshire made an investment in Level 3 Communications ( LVLT) convertible notes.

Leucadia isn't the only new WilTel fan, either: In Berkshire's 13F quarterly disclosure to the Securities and Exchange Commission released Wednesday, Buffett's firm disclosed that it had purchased 1.5 million shares in WilTel.

Berkshire and Leucadia are joint-venture partners in Berkadia, which in March made a bid for bankrupt Conseco's mobile-home financing unit that was rejected by the bankruptcy judge. Berkadia also owns half of Finova, acquiring the stake in 2001 in exchange for a $6 billion loan to the then-bankrupt lender.

Why WilTel?

Why would Leucadia and Buffett be interested in a down-on-its-luck telco outfit like WilTel? Well, its multidecade "master services agreement" with SBC Communications ( SBC), for starters -- a 20-year contract that was imperiled but emerged intact through the bankruptcy proceedings. WilTel also has a nationwide broadband network -- the one it spent roughly $8 billion to build, which helped push it into bankruptcy.

"They are the preferred provider for SBC Communications -- in effect, they have all of SBC's voice and data business outside of their local areas for the next 17 years," Bruce Berkowitz, co-manager of Fairholme Funds, said in an interview with TheStreet.com published Monday. Fairholme, which holds sizable stakes in Berkshire and Leucadia, also took a large position in WilTel recently. Co-manager Larry Pitkowsky, reached today, declined to comment on the Leucadia offer.

According to Thursday's news release, WilTel and Leucadia agreed last year that Leucadia could make a "permitted investor tender offer" but not before Oct. 15, 2004, unless it was approved by the company directors. "Since that time, it has become clear to Leucadia that it would be in the best interests of both Leucadia and the WilTel stockholders unaffiliated with Leucadia to provide an opportunity for WilTel stockholders to receive Leucadia shares in exchange for their shares of WilTel common stock," Leucadia said in the release.

If Leucadia acquires 90% or more of WilTel's shares outstanding, it plans a "back-end merger" at the offer price. Further, if Leucadia acquires all publicly held WilTel shares, WilTel's former stockholders would own 13.6% of Leucadia, the company said.

Who's Leucadia?

The deal also puts the spotlight on Leucadia, an extremely successful holding company that typically draws little attention from Wall Street.

"Leucadia is one of the few companies that has a better return than Berkshire over the past 25 years," said Robert Howard, who writes the Springfield, Mo.-based investor newsletter Positive Patterns. Despite having a Park Avenue address, Leucadia "has kept a lower profile the past few decades than Jimmy Hoffa."

In addition to its 47% stake in WilTel and its 25% stake in Finova through Berkadia, the company also has investments in AmeriKing, Carmike Cinemas ( CKEC) and HomeFed.

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